CHICAGO, July 18, 2018 /PRNewswire/ -- Grainger (NYSE: GWW) today reported results for the 2018 second quarter ended June 30, 2018. Sales of $2.9 billion increased 9.4 percent versus $2.6 billion in the second quarter of 2017. Operating earnings for the quarter of $344 million were up 50 percent versus $229 million in the 2017 second quarter. Earnings per share of $4.16 increased 149 percent versus $1.67 in the 2017 second quarter. Adjusted earnings per share of $4.37 increased 59 percent versus $2.74 in the 2017 second quarter. The improvement in earnings was driven mostly by higher sales, operating expense leverage, a lower tax rate and a lower share count.

Quarterly Financial Summary

($ in millions)

Q2 2018

Q2 2017

Change

Reported

Adjusted (1)

Reported

Adjusted (1)

Reported

Adjusted (1)

Net sales

$2,860

$2,860

$2,615

$2,615

9%

9%

Gross profit

$1,111

$1,112

$1,040

$1,043

7%

7%

Operating earnings

$344

$359

$229

$291

50%

23%

Net earnings

$237

$249

$98

$161

142%

54%

Diluted earnings per share

$4.16

$4.37

$1.67

$2.74

149%

59%

Gross profit margin

38.8%

38.9%

39.8%

39.9%

(100) bps

(100) bps

Operating margin

12.0%

12.6%

8.8%

11.1%

320 bps

150 bps

(1) Results exclude restructuring as shown on pages 8-9 of this release. Reconciliations of the adjusted measures reflected in this table to the most directly comparable GAAP measures are provided on pages 8-9 of this release.

"The second quarter exceeded our expectations, with strong growth from U.S. large and medium customers, gross profit that was better than anticipated and meaningful operating expense leverage. We continue to gain share across both large and medium customers and acquire medium customers amid a strong economy. In Canada, we are on schedule with the business turnaround. And the single channel and international businesses also improved operating performance," said DG Macpherson, Chairman and Chief Executive Officer. "Based on our performance and momentum, we are raising our sales and earnings per share guidance for the year."

The company raised its 2018 sales and earnings per share guidance for the year and now expects sales growth of 5.5 to 8.5 percent and earnings per share of $15.05 to $16.05. The company's previous 2018 guidance, communicated on April 19, 2018, was sales growth of 5 to 8 percent and earnings per share of $14.30 to $15.30.

2018 Guidance

As of4/19/2018

As of7/18/2018

Sales ($ billions)

$10.9 - $11.3

$11.0 - $11.3

% vs. prior year

5% to 8%

5.5% to 8.5%

Adjusted operating earnings ($ billions)

$1.2 - $1.3

$1.3 - $1.4

% vs. prior year

6% to 14%

10% to 18%

Adjusted operating margin

11.1% - 11.5%

11.5% - 11.9%

bps vs. prior year

10 to 50

50 to 90

Adjusted earnings per share

$14.30 - $15.30

$15.05 - $16.05

% vs. prior year

25% to 33%

32% to 40%

Company Sales increased 9.4 percent in the 2018 second quarter versus the 2017 second quarter, driven by a 9 percentage point increase from volume and 1 percentage point from foreign exchange, partially offset by a 1 percentage point decline from the divestiture of a specialty business.

Reported gross profit margin for the quarter was 38.8 percent vs. 39.8 percent in the 2017 second quarter. Adjusted gross profit margin for the quarter was 38.9 percent vs. 39.9 percent in the prior year. The lower gross profit margin includes a 0.5 percentage point decline from implementation of the Financial Accounting Standards Board's new revenue recognition standard that primarily reclassifies certain costs related to KeepStock services from operating expenses to cost of goods sold and a 0.2 percentage point decline from the timing of the company's annual sales meeting. When normalized for the impact of the revenue recognition standard and the timing of the sales meeting, gross profit margin for the 2018 second quarter was 39.2 percent, a decline of 0.3 percentage points versus the 2017 second quarter.

Company operating earnings of $344 million for the 2018 second quarter increased 50 percent versus $229 million in the 2017 second quarter. Adjusted operating earnings of $359 million increased 23 percent versus $291 million in 2017. The improvement in earnings was driven by higher sales and strong operating expense leverage. Reported operating margin for the quarter was 12.0 percent, an increase of 3.2 percentage points versus the prior year. Adjusted operating margin was 12.6 percent, an increase of 1.5 percentage points versus the prior year.

For the second quarter, the effective tax rate in 2018 was 23.4 percent versus 48.4 percent in the 2017 second quarter. The decrease was primarily due to the 2017 U.S. tax legislation and the 2017 impact from the wind-down of the Colombia business. The company is currently projecting an effective tax rate of 23 to 26 percent for the year 2018. The second quarter contained a benefit from the tax treatment of stock-based awards. Estimated tax benefits from stock-based awards are not included in the full year projected tax rate.

Cash FlowDue to strong operating performance, operating cash flow was $248 million in the 2018 second quarter versus $191 million in the 2017 second quarter, representing a 30 percent increase versus the 2017 second quarter. Free cash flow in the quarter was $211 million versus $160 million in the prior year, representing a 32 percent increase. The company used the cash generated during the quarter to invest in the business and return cash to shareholders through share repurchase and dividends. Capital expenditures in the 2018 second quarter were $54 million. In the quarter, Grainger returned $111 million to shareholders through $83 million in dividends and $28 million to buy back 96,000 shares of stock.

WebcastGrainger will conduct a live conference call and webcast at 11:00 a.m. Eastern Daylight Time on July 18, 2018, to discuss the second quarter. The webcast will be hosted by DG Macpherson and Tom Okray, Senior Vice President and Chief Financial Officer and can be accessed at www.grainger.com/investor. For those unable to participate in the live event, a webcast replay will be available for 90 days at www.grainger.com/investor.

About GraingerW.W. Grainger, Inc., with 2017 sales of $10.4 billion, is North America's leading broad line supplier of maintenance, repair and operating products (MRO), with operations also in Europe, Asia and Latin America.

All statements in this communication, other than those relating to historical facts, are "forward-looking statements." These forward-looking statements are not guarantees of future performance and are subject to a number of assumptions, risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from such statements. These forward-looking statements include, but are not limited to, statements about future strategic plans and future financial and operating results. Important factors that could cause actual results to differ materially from expectations include, among others: higher product costs or other expenses; a major loss of customers; loss or disruption of source of supply; increased competitive pricing pressures; failure to develop or implement new technologies; the implementation, timing and success of our strategic pricing initiatives; the outcome of pending and future litigation or governmental or regulatory proceedings, including with respect to wage and hour, anti-bribery and corruption, environmental, advertising, privacy and cybersecurity matters; investigations, inquiries, audits and changes in laws and regulations; disruption of information technology or data security systems; general industry or market conditions; general global economic conditions; currency exchange rate fluctuations; market volatility; commodity price volatility; labor shortages; facilities disruptions or shutdowns; higher fuel costs or disruptions in transportation services; natural and other catastrophes; unanticipated weather conditions; loss of key members of management; our ability to operate, integrate and leverage acquired businesses; changes in credit ratings; changes in effective tax rates and other factors which can be found in our filings with the Securities and Exchange Commission, including our most recent periodic reports filed on Form 10-K and Form 10-Q, which are available on our Investor Relations website. Forward-looking statements are given only as of the date of this communication and we disclaim any obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.

CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)

(In thousands of dollars, except for per share amounts)

Three Months EndedJune 30,

Six Months EndedJune 30,

2018

2017

2018

2017

Net sales

$

2,860,212

$

2,615,269

$

5,626,613

$

5,156,398

Cost of goods sold

1,749,271

1,575,313

3,423,913

3,097,250

Gross profit

1,110,941

1,039,956

2,202,700

2,059,148

Selling, general and administrative expense

766,955

810,876

1,523,884

1,537,567

Operating earnings

343,986

229,080

678,816

521,581

Other income and (expense)

Interest income

1,014

465

1,642

658

Interest expense

(22,924)

(22,468)

(47,589)

(41,181)

Equity method investment

(3,043)

(6,121)

(14,540)

(14,495)

Other non-operating income

4,327

6,240

12,025

11,306

Total other expense, net

(20,626)

(21,884)

(48,462)

(43,712)

Earnings before income taxes

323,360

207,196

630,354

477,869

Income taxes

75,617

100,237

141,826

188,057

Net earnings

247,743

106,959

488,528

289,812

Net earnings attributable to noncontrolling interest

10,762

9,038

20,012

17,147

Net earnings attributable to W.W. Grainger, Inc.

$

236,981

$

97,921

$

468,516

$

272,665

Earnings per share

-Basic

$

4.19

$

1.68

$

8.29

$

4.64

-Diluted

$

4.16

$

1.67

$

8.23

$

4.61

Average number of shares outstanding

-Basic

56,110

58,013

56,087

58,363

-Diluted

56,553

58,287

56,479

58,741

Diluted Earnings Per Share

Net earnings as reported

$

236,981

$

97,921

$

468,516

$

272,665

Earnings allocated to participating securities

(1,806)

(643)

(3,797)

(2,125)

Net earnings available to common shareholders

$

235,175

$

97,278

$

464,719

$

270,540

Weighted average shares adjusted for dilutive securities

56,553

58,287

56,479

58,741

Diluted earnings per share

$

4.16

$

1.67

$

8.23

$

4.61

NOTE: Results for 2017 have been restated due to adoption of Accounting Standards Update (ASU) 2017-07, Compensation Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The ASU effectively increases Selling, general and administrative expense, lowering Operating earnings, and decreases Total other expense, net, with no impact on Net earnings or Earnings per share. Restated 2017 quarterly and annual financials can be found at www.grainger.com/investor.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands of dollars)

Assets

June 30, 2018

December 31, 2017

Cash and cash equivalents

$

312,461

$

326,876

Accounts receivable – net

1,462,603

1,325,186

Inventories

1,464,181

1,429,199

Prepaid expenses and other assets

106,672

86,667

Prepaid income taxes

27,085

38,061

Total current assets

3,373,002

3,205,989

Property, buildings and equipment – net

1,359,908

1,391,967

Deferred income taxes

27,619

22,362

Goodwill

535,121

543,903

Intangibles – net

533,641

569,115

Other assets

75,281

70,918

Total assets

$

5,904,572

$

5,804,254

Liabilities and Shareholders' Equity

Short-term debt

$

54,222

$

55,603

Current maturities of long-term debt

30,172

38,709

Trade accounts payable

735,266

731,582

Accrued compensation and benefits

234,791

254,560

Accrued contributions to employees' profit sharing plans (1)

59,375

92,682

Accrued expenses

272,238

313,766

Income taxes payable

38,431

19,759

Total current liabilities

1,424,495

1,506,661

Long-term debt

2,210,358

2,248,036

Deferred income taxes and tax uncertainties

117,209

111,710

Employment-related and other non-current liabilities

102,241

110,114

Shareholders' equity (2)

2,050,269

1,827,733

Total liabilities and shareholders' equity

$

5,904,572

$

5,804,254

(1)

Accrued contributions to employees' profit sharing plans decreased $33 million primarily due to the annual cash contributions to the profit sharing plan.

(2)

Common stock outstanding as of June 30, 2018 was 56,133,815 compared with 56,328,863 shares at December 31, 2017, primarily due to share repurchases.

The company supplemented the reporting of financial information determined under U.S. generally accepted accounting principles (GAAP) with certain non-GAAP financial measures, which the company refers to as "adjusted" measures, including adjusted gross profit, adjusted gross profit margin, adjusted operating earnings, adjusted operating margin, adjusted net earnings and adjusted diluted earnings per share. Free cash flow is not defined under GAAP. The company defines free cash flow as net cash flow provided by operating activities less purchases of property, buildings and equipment plus proceeds from the sale of assets. The company believes free cash flow is meaningful to investors as a useful measure of performance and the company uses this measure as an indication of the strength of the company and its ability to generate cash. Adjusted measures exclude items that may not be indicative of core operating results. The company believes that these non-GAAP measures provide meaningful information to assist shareholders in understanding financial results and assessing prospects for future performance. Management believes adjusted gross profit, adjusted gross profit margin, adjusted operating earnings, adjusted operating margin, adjusted net earnings and adjusted diluted earnings per share are important indicators of operations because they exclude items that may not be indicative of our core operating results, and provide a better baseline for analyzing trends in our underlying businesses. Because non-GAAP financial measures are not standardized, it may not be possible to compare these financial measures with other companies' non-GAAP financial measures having the same or similar names. These adjusted financial measures should not be considered in isolation or as a substitute for reported results. These non-GAAP financial measures reflect an additional way of viewing aspects of operations that, when viewed with GAAP results, provide a more complete understanding of the business. The company strongly encourages investors and shareholders to review company financial statements and publicly filed reports in their entirety and not to rely on any single financial measure.

Second quarter 2018 charges related to restructuring actions and sales of branches in the United States, restructuring actions in Canada, restructuring in Other Businesses and the sale of real estate in Unallocated expense. Second quarter 2017 charges related to restructuring actions and sales of branches in the United States, branch closures and other restructuring in Canada and primarily the wind-down of the business in Colombia in Other Businesses.

(2)

The tax impact of adjustments is calculated based on the income tax rate in each applicable jurisdiction, subject to deductibility limitations and the company's ability to realize the associated tax benefits.